IN COMPANY OF ANGELS

Many ideas die for lack of money. Perhaps you need an angel at your table. Barbara Biggs reports in The Sunday Herald Sun March Edition of "Your Business" March 7 1999

Chris Kaine began her Business Angels matching service after she realised the untapped financial potential of corporate sector retirees.

"The corporate world is tipping out these highly skilled 50-plus-year-olds like nobody's business," she said. "They're unlikely to ever be employed again and small businesses can't afford to employ them as consultants. These people often have substantial pay-outs. They could effectively buy themselves a rewarding job. If you can match them with an operator of a small business that they feel passionate about, or have an interest in, I realised that this could be the solution for both parties."

When Ms Kaine established Business Angels she had already matched more than 20,000 people for compatible house sharing. "After interviewing as many people as I have you start to see patterns emerge," she said. "I think there's basically only about a dozen personality types and I've worked out a system which links those that are compatible for others." It costs $300 to register with Business Angels - "that gets rid of the tyre-kickers", she said. Ms Kaine then interviews the prospective small business or investor and classifies them by the types of personalities that will suit their own.

"In the initial interview, I discuss how much equity is for sale and how much it might be worth," she said. "If a business owner begins by saying they want to retain 51 per cent equity I won't proceed. "Each director should have an equal position, otherwise the partnership won't work. What sort of partnership can it be if partnership if one always has the upper hand?" However, if someone does not want to part with so much equity, a percentage can be held in trust. For example an Angel could have 40 per cent, the business owner 40 per cent and 20 per cent could remain in trust.

After Ms Kaine finds a suitable match, both parties meet informally. If the meeting is successful, further meetings are arranged in which each party lays their cards - business plans and financial - on the table. Then each party investigates the other's work more closely to understand how the partnership may work. The final stage is a formal agreement outlining the type of involvement, investment capital, equity split, any shareholders agreements and tax issues. "After the match I try to keep in touch," Ms Kaine said. "But in the end, it's really up to each individual to make the partnership work."

The small business adviser of the Australian Society of Certified Practising Accountants, Kerrie Clayton, said she received more inquiries about informal equity or business angel partnerships than about any other issue. "I'm absolutely swamped with inquiries," she said. "We're doing our best to disseminate information about the option to our members, many of whom had never heard of it." She said many retrenched senior managers "not yet ready to play golf every day" had money to invest and wanted to be involved in a small business. "It can create a lifestyle for them which can ease them into retirement," Ms Clayton said. "Some want no involvement, while others want to have some say - they don't want to take over, but they do want to use their skills." She said she believed the business angel option would become increasingly important and be taken up by more small businesses dissatisfied with deals offered by banks.

Happy Match: That's the Good Oil

If the right angel comes along it can be a godsend to a struggling business. When Bill Molyneux went looking for a partner-investor he owed more than $1 million and needed working capital for his budding business as well "I knew I wasn't in an ideal position, but I had confidence that the business had great potential," Mr Molyneux said. The 63-year-old and his wife, Sue Forrester, 53, lost everything they had invested over 30 years in their native plant business in the economic bust of the late 1980s. After starting a new business specialising in trees with essential oils or unusual fruits, finance through banks was "out of the question". "We'd thought of putting ads in the paper for an investor, but didn't act on it," Mr Molyneux said. "Then, about 31/2 years ago we saw an article in a business magazine about Chris Kaine (Business Angels matching service) and we joined up with her for a nominal fee,"

The match threw up Colin Austin, now 58, a former engineering professor who had made his money with a computerised mould for the plastics industry. The pair met at Mr Molyneux's home and liked each other immediately. After several more meetings, Mr Austin paid out creditors and took over the titles to two properties - including Mr Molyneux's House. He also provided more than $500,000 of investment capital, half of which was to be repaid by Mr Molyneux when the company began making a profit.

For his contribution, Mr Austin became a 50 per cent partner in Austraflora. In the first year, the business turned over about $100,000 and had large overheads. By the end of next year, when Austraflora's line of genetically enhanced citronella trees hits the Japanese, European and US markets, that figure will jump to $500,000. But the best news for the partners is that in the past few months overheads have reduced dramatically. All stock has been sold so turnover will be almost all royalty payments, with the plants being provided by an independent operator. "That's when I'll be able to afford to start paying Colin back," Mr Molyneux said. Mr Austin has little involvement in the business.

The pair meet every two months and sometimes during meetings Mr Austin has suggested ideas that have changed the direction of the business. "He's not looking over my shoulder the whole time to see what I'm doing," Mr Molyneux said. "He comes from the base of assuming I know what I'm doing. And I've also helped him out with my soil expertise in his other business as well"

The most important thing, he says, about finding an angel is not "rushing in to grab the money or the ideas". "You have to focus on whether the personalities will work together, because that will be the vital thing for the success of the partnership." It is obvious the pair like each other, and gestures like Mr Austin putting Mr Molyneux's name back on the title to his former house go a long way to establishing trust and a good working relationship. The pair have had their disagreements, but nothing that could not be worked out.

Blinded by the light of funding

Not all business angel matches are successful. From 1' to 1996 Peter Scrivenor, who owns a window furnishing company, wanted to find venture capital to expand his business. It had already grown and won major contracts, such as one with Melbourne Central worth $450,000 and another to provide the movable wall-windows for Southgate restaurant terraces.

"I met about a dozen prospective investors... that never went anywhere," Mr Scrivenor said "I was looking at an investment of between $200,000 and $250,000 to buy tooling for products, initial stocks, marketing and staff training. Some got so close we were within weeks of drawing up a partnership contract. Each one of those took up to three days of discussions and negotiations."

Eventually a match came with an investor who was offering substantially less than the business needed, but who promised more funds would become available on increased profits. "There were very tight contracts drawn up which, in retrospect, were quite one-sided," Mr Scrivenor said. "He wanted more equity than I was really prepared to give, but he also promised to help out with his skills as the business grew." Within six months the business turnover grew by half.

"Along with that came growing pains, and we needed help with cash flow and staff management," Mr Scrivenor said. "Basically, whenever I rang the partner for help he'd ask me what I was going to do about it. I realised he wanted an investment without involvement and that's not really what I needed." The partners have agreed to part company once a more suitable investor can be found.

All the experiences have honed Mr Scrivenor's focus about what he does need in a partner. "I'm looking for someone who can come in and appreciate what the business is about and who wants to become part of it," he said. "In the past I always felt I was the one in a weaker position because I was asking for cash - like I had to convince them to hand it over.

"Now I'm not interested in that because what I'm offering is a great opportunity to make money and if they aren't able to grasp that then I don't want the partnership." He said the figures spoke for themselves, with business turnover growing at 50 per cent annual in the past two years.

Mr Scrivenor said he wanted his next partner to have marketing skills and/or product manufacturing skills and to have demonstrated the business acumen to help tap the export and import replacement segment of the market. "It doesn't have to be someone who loves blinds - it's not my passion either - but all the research show that the other players in the market are amateurs," he said. "It's a $500 million-a-year business and 60 per cent is run by family companies." Mr Scrivenor said that in the end ending capital was only half the story. "I also want someone with management skills and who can act as a mentor, someone who can bring more to the business than just money."

Purse Holder Treads Warily

The profile of a business angel is specific. A report by the National Investment Council found that most are in their 30s, have an undergraduate degree, earn between $50,000 and $200,000 a year and typically have up to 14 per cent of their capital in entrepreneurial ventures.

While most have between $50,000 and $500,000 to invest, 40 per cent only want to invest between $20,000 and $50,000 in the next year. The 1995 report said most angels expected a 80 per cent or better return on their money because of the risk involved, and preferred an established business to one starting out.

The reason is simple, according to one angel seeking a suitable business match. "A raw venture is hard because the inertia you have to overcome to get it off the ground is huge," Stefan D---- said. A year ago Mr D----, a 40-year-old dentist, completed a, masters degree in enterprise and innovation from Swinburne University, one of only three courses of its type in the world.

He is searching for a venture in the technology or service area and has up to $200,000 to invest. He applies strict criteria, learned in his course, for eliminating unsuitable propositions. "Most people think a good idea is a good business opportunity," Mr Danylak said. "But it isn't until the expensive market research is done, any fatal flaws in the idea are examined and an exit strategy for the investor has been found."

Research shows some of the best business opportunities come from inventors, but that they are the least likely to be able to strike a mutually agreeable partnership/equity arrangement. "Inventors just see millions of dollars being generated from their invention and they don't want to give any of it away," Mr Danylak said. "They don't see that the path from the idea to lucrative profits requires research, marketing strategies, capital and expertise. "The reality is that without those things the invention often doesn't get off the ground, or in the time it takes the inventor to act someone else invents the same thing."

Business angel Colin Austin agrees. He formed a company called Australian Innovation Centre which had 400 inquiries in its first year. "The vast majority were nutters," he said. "The problem with the others was, even though they (the inventions) were good, you had to find a way for both of us to make money." Even in assessing an idea "you can blow $10,000 on international market research". "A lot of inventors are paranoid about someone taking their invention away from them or sharing the profits," Mr Austin said. "They're the most difficult people to strike a deal with."